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Lives, Interrupted: The New Austerity

LESS IS MORE Peter Pia helping Ann Ramsey at Labriola Frame and Art Gallery in Stamford, Conn.Credit
Joyce Dopkeen/The New York Times

PETER PIA’S business mirrors the turmoil that has beset the economy. He does not work on Wall Street, nor is he advising those who have been laid off. He runs a frame shop, Labriola Frame and Art Gallery in Stamford, Conn., and has seen firsthand how customers’ expectations about their financial futures have been radically altered.

When the stock market fell in the fall, Mr. Pia and the gallery’s principal owner, Sandy Labriola, noticed that their business had dropped with it. (Many who live in this very affluent area about 30 miles north of New York City work in financial services.) So they laid off their four employees at Thanksgiving and prepared for the worst. Instead, in the last weeks of the year, typically a slow time, business boomed.

Still, Mr. Pia said he was concerned about how business would play out over the rest of the year. “We can’t look at past figures,” he said. “That’s out the window. There’s no previous years’ comparisons.”

Listen closely enough and Mr. Pia sounds like a financial adviser. That may be because in the last six months people who would normally not be so worried about finances are focused on their individual bottom lines. Even with a steady income, he has started bringing his lunch to work and cut out his daily trips to Starbucks.

“People have a totally different frame of mind,” said Mary Deatherage, a managing director at Smith Barney in Little Falls, N.J. “We need a chance to breathe.”

Some clients Ms. Deatherage has worked with for two decades are completely rethinking the way they want to invest, from how much risk they can stomach to their long-term goals, she said. The ones in the greatest state of shock are those who have just retired or who have children going off to college.

“Now, before we talk about their portfolios, we say, How are you feeling?” she said. “Are you really afraid this is going to zero? You’d be surprised how many think that.”

Clients like hers, not to mention picture framers, have plenty of company in their soul-searching. Financial advisers themselves are wondering about the viability of their careers. While some big brokerage firms are using consolidation to attract top advisers, others are cutting loose their lower performers. In yet other cases, advisers are wondering if they are still in the right career.

Tim Hill, the national sales director for Principal Funds, a mutual fund wholesaler, said his sales representatives had been reporting an increase in the number of advisers considering new occupations. Those who are not, he said, were less likely to ask for information on new products and more apt to ask for help in understanding how to talk to their clients about enormous losses. Coaching an adviser on how to talk to disgruntled clients is not easy, but it may be easier than selling them a mutual fund.

Principal’s flagship products, Strategic Asset Management Portfolios, were down 18 to 40 percent for 2008, their five-year averages down to negative 3.71 per year from positive 0.39.

The key now is to manage expectations. It was only a year ago that a 7 percent return was average. Now, with the Standard & Poor’s Index down more than 38 percent in 2008, a portfolio that posted a single-digit return would be cause for celebration.

One way to manage expectations is to trust that the economy will rebound, and with it, jobs, portfolios and housing values.

“The only thing I know is we will have a recovery,” said Rick Kahler, founder of the Kahler Financial Group in Rapid City, S.D., and an author of “The Financial Wisdom of Ebenezer Scrooge: 5 Principles to Transform Your Relationship With Money.”

Mr. Kahler said it was important to acknowledge just how bad the market is. “I hang out with them in the pain,” he said. “About the worst thing I could do is say, You still have 75 percent left.”

The decline can also be used as an opportunity to change financial behavior. Some people lived beyond their means, while others lived to their limits, figuring the bull market would never end. Both groups have to face the choices they made.

“This great recession is a time for an epiphany and to change,” said Mark Stevens, author of “Rich Is a Religion: Breaking the Timeless Code to Wealth.” “If you only have three months of savings and no job, there is nothing you can do. You have to look forward.”

For him, the crucial question is how people will live when times improve. Will they return to their spendthrift ways or live below their means?

Mr. Stevens said he believed the likely result was embedded in human nature. “The Dow will hit bottom, and then it will start going up again,” he said. “Once it does, people will take a sigh of relief.” At that point, he said, the economy might be better, but the personal boom-and-bust cycle would be starting over.

Both the wait-and-see and puritanical philosophies are luxuries for many. Some need to take emergency financial steps now. They are stuck in the personal equivalent of a liquidity crunch: they have assets, but their cash is limited.

Joseph Montanaro, a financial planner at USAA, an insurer based in San Antonio, has suggested to clients who are running out of options that they refinance 15-year mortgages and take out 30-year ones. This frees cash for more immediate needs, like sending a child to college in the fall.

Mr. Montanaro admits this is not ideal — cash-out refinancings did, after all, contribute to the mortgage market’s collapse. But he says he considers the current financial disruption a life event on a par with getting married or having children. It is so significant that people need to re-evaluate everything they are doing.

“One of my messages is: there are a lot of things you can do, but you can’t take the right steps unless you evaluate where you stand.”

A version of this article appears in print on , on Page SPG2 of the National edition with the headline: Lives, Interrupted: The New Austerity. Order Reprints|Today's Paper|Subscribe